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Fines for Conducting Unregistered Security Offerings

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Crypto Research
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While the legal battle between the SEC and Ripple is being discussed a lot right now and has taken some surprising turns in recent months, looking at the SEC’s actions against companies that have conducted unregistered ICOs, it’s striking that the regulator has charged many different companies of varying sizes.

The United States solidified its position as the most popular jurisdiction for the incorporation of STOs, with Switzerland being a distant second.

STO Count by Country of Incorporation, 2017 – 2020

“In simple words, tokenization can turn almost any asset, either real or virtual, into a digital token and enables the digital transfer, ownership and storage without the necessary need of a central third party / intermediary.”

E&Y Tokenization of Assets

Largest Fines for Conducting Unregistered Security Offerings

Looking at the SEC’s charges against companies that completed unregistered ICOs, we can say that the Securities and Exchange Commission goes after companies of all stripes. Indeed, while the largest ICO that faced the allegations from the SEC brought in a whopping $4 billion, there are much smaller companies that were also charged with fraudulent ICOs.

A vivid example is the SEC case against B2B blockchain marketplace Opporty. The company completed an ICO in 2018 and raised $600,000.43 Nevertheless, the company did break the law as it conducted unregistered securities offering by selling OPP tokens in an ICO and misleading the investors, according to the SEC.44

Although some cases are still pending, many cases have already finished and some companies have been forced to pay civil fines. However, the fine is a light penalty in comparison to the companies that were forced to return the raised funds to investors. (Table 3)

However, there is a second tool that the SEC uses to punish companies that host illegal security sales: disgorgement. This type of punishment seems to be used by the SEC more often, and it is more severe as the value of disgorgement and prejudgement interest usually outstrips the proceeds from an ICO. (Table 4)

With many surprising plot twists packed into a few months, the SEC versus Ripple lawsuit tends to be the most-talked about of the ongoing litigations. The essence of the SEC claim is that Ripple was conducting an unregistered sale of securities.45 However, Ripple’s position is based on the fact that XRP tokens should be classified as commodities, not securities, like Bitcoin and Ethereum. Ripple seems to be sure of its high chances to win the case as the company announced its plan to go public once the agreement with the SEC is settled.46

Another ongoing case is against LBRY, a decentralized video content platform, which is accused of hosting a four-year-long unregistered securities sale. After the SEC complaint in March, 2021, the company tried to raise a wave of publicity to support the project. The advocates for LBRY stressed that the project tokens, LBRY Credits, are not investment contracts, while the SEC highlighted that the company tokens are indeed securities according to the Howey test. The litigation continues, but it seems like the SEC will win the case.

The crypto industry advances, and so does the crypto regulation. The SEC is closely following the development of the industry: Hester Pierce, the SEC’s “crypto mom”, recently commented on the NFTs gold rush. Potentially subject to speculative activities, NFTs could be easily turned into securities if they are fractionalized.47 Due to grey areas in the regulation, the companies that offer such investment vehicles could get under the SEC’s fire.

Completed Cases Without Disgorgement

Completed Cases With Disgorgement

There are several estimates on the size of the security token market, but even more complex are the projections for the future development of the same. Therefore we will look at different assumptions that have been made by financial institutions over the last few months in the next week.

43 https://cointelegraph.com/news/sec-charges-600-000-ico-project-opporty-for-fraudulent-security-offering
44 https://www.sec.gov/litigation/litreleases/2020/lr24723.htm
45 https://www.sec.gov/news/press-release/2020-338
46 https://cointelegraph.com/news/ripple-wants-go-public-after-settling-sec-lawsuit-sbi-ceo-says
47 https://cointelegraph.com/news/sec-s-crypto-mom-warns-selling-fractionalized-nfts-could-break-the-law

48 https://www.wsj.com/articles/investors-bet-4-billion-on-a-cryptocurrency-startup-1527591600
49 https://www.sec.gov/news/press-release/2019-202
50 https://www.sec.gov/news/press-release/2019-164
51 https://www.sec.gov/news/press-release/2019-164
52 https://www.sec.gov/news/press-release/2020-211
53 https://www.sec.gov/news/press-release/2020-211
54 https://www.sec.gov/news/press-release/2019-87
55 https://www.sec.gov/news/press-release/2020-262
56 https://www.sec.gov/litigation/admin/2020/33-10909.pdf
57 https://www.sec.gov/litigation/admin/2020/33-10909.pdf
58 https://www.sec.gov/news/press-release/2019-212
59 https://www.sec.gov/news/press-release/2020-124
60 https://www.sec.gov/litigation/litreleases/2020/lr24763.htm
61 https://www.sec.gov/litigation/litreleases/2020/lr24763.htm
62 https://www.sec.gov/news/press-release/2019-15
63 https://www.sec.gov/divisions/enforce/claims/reginald-middleton.htm
64 https://www.sec.gov/news/press-release/2020-181
65 https://www.sec.gov/news/press-release/2017-219
66 https://www.coindesk.com/plexcorps-reaches-settlement-with-sec-following-extended-legal-woes

This article is an extract from the 90+ page Security Token Report 2021 co-published by the Crypto Research Report and Cointelegraph Consulting, written by thirteen authors and supported by Crypto Finance, Blocklabs Capital Management, HyperTrader, Ten31 Bank, Stadler Völkel Attorneys at Law, Riddle&Code, Coinfinity, Bitpanda Pro, Tokeny Solutions, AlgoTrader, and Elevated Returns.

Tokenizing a Bond: Pain or Gain?

By
Crypto Research
-

Tokenized Securities are shaping up as one of the most promising applications for public blockchains, but in which case do they represent an opportunity and in which case do they represent more of a risk?

Practitioner Perspective with Dominik Spicher of the Crypto Finance Group

Within the security universe, interest is strongest in tokenized bond offerings. This investment category is estimated to be worth ~$2.6 trillion by 2025.1 It is worth looking into the mechanics of tokenized bonds and the challenges that arise in a blockchain context. Overall, the specific advantages that tokenized bonds offer stakeholders compared to their traditional form outweigh these factors.

The main challenges facing tokenized bond offerings are the rules and regulations that issuers and other participants are subject to. None of these are fundamental by nature, but they require more tooling and standardization. One of the main opportunities is the advent of multiple institutions cooperating on bond issuance in a transparent way without reliance on trust.

The Tokenised Bond Lifecycle

Pre-issuance

In a tokenized bond offering, similar to a traditional bond offering, pertinent loan parameters — the offering volume, coupon rate and duration — need to be set. These parameters are directly expressed in the smart contract logic, typically within a contract template. The trustless execution on a public smart contract platform ensures adherence to these terms.

It is possible to move the entire offering, book-building and subscription process on-chain, but it is more common and practical to apply the same procedures as traditional offerings do. The advent of stablecoins, however, has made it more attractive to move the actual bond purchase on-chain. Final delivery of the bond tokens is then trustless and atomic, alleviating the need for payment agents and escrow services, thus reducing issuing costs. However, fulfilling regulations for Know Your Customer rules in the smart contract functions poses the main challenge here. 2

Post-issuance

As for almost all digital assets, bond tokens need to be securely storable, transferable, tradable and recoverable during the bond’s lifetime. Financial institutions have many options for digital asset custody and storage, and these options are also available for bond tokens. For those purposes, it is an advantage for the smart contract to adhere to standards, such as the ERC-20 specification. Unfortunately, however, the ecosystem is still in a consolidation phase when it comes to standards supporting more complex functionality, such as permissioned transfers.

Tokens that are not classified as securities typically enjoy completely permissionless transfers. Because the issuing institutions for tokenized bonds are subject to various regulations in virtually all jurisdictions, this is typically unfeasible. In response, approaches have emerged to reconcile compliant behavior and the censorship-resistant nature of public blockchains from simple whitelisting to flexible just-in-time transfer approval. Finding the right trade-off between the end-user experience and the scalability of the underlying platform remains a challenge.

A fundamental requirement when tokenizing bonds is the ability to price the underlying security and its risks in a secondary market. For many security tokens, this can happen off-chain on centralized exchanges or, more interestingly, on-chain on decentralized exchanges, such as Uniswap. However, avoiding liquidity fragmentation across platforms is even more important with tokenized bond offerings, which typically suffer from a lack of liquidity.

Even though smart contract security has made big advances, bond token contracts typically contain an administrator functionality to allow for reactions to unforeseen circumstances, e.g. pausing all transfers. In addition, it is advisable for issuers to be able to handle private key loss by bond token holders. This is especially relevant when coupon and redemption payments happen on-chain.

Finally, bonds usually exhibit regular coupon payments. The public blockchain as the final source of truth makes it convenient for issuers to determine the ultimate beneficiaries of coupon payments: The very same addresses holding the bond token at a particular date in time, which may be expressed in terms of block height, can receive the appropriate amount of stablecoin tokens or some other suitable means of payment on-chain. The flexible nature of smart contracts allows for corporate calendar events to be integrated into the asset itself.

Redemption

After the bond has expired, the principal is returned to the current token holders. Similar to coupon payments, this can be handled elegantly on-chain with the use of stablecoins, typically after bond token transfers have been disabled.

In order for the on-chain state to reflect the expired bond state, tokens are typically reclaimed by the issuer and subsequently burned — i.e., sent to an address where nobody can spend from — and it could even involve the destruction of the smart contract itself, thus removing all bond artifacts.

Challenges in an On-chain Environment

The main challenge is balancing the manifold possibilities of a public smart contract platform on the one hand and the regulatory environment on the other hand. Today, there is still substantial regulatory uncertainty with respect to the legal status of blockchain-based securities and the legal claims that holders may make, although developments, such as the Swiss DLT bill 3, clarify many previously open questions.

Well-established compliance requirements also apply to tokenized securities and need to be adhered to. Among the most salient ones are KYC rules and Anti-Money Laundering legislation. The inherently open and global nature of blockchains poses an especially pertinent problem here, as legislative details vary across jurisdictions. For example, it is customary to apply specific rules for potential U.S. investors in a security.

Such rules need to be included in a tokenized security offering. Typically, completely on-chain solutions are undesirable for usability, privacy and cost reasons. Instead, most approaches opt for a hybrid on- and off-chain workflow. For example, transfer requests could be required to provide additional associated data that establishes approval by an off-chain entity.

The most important advance needed in this regard is standardization. International bodies, such as the Financial Action Task Force, are starting to propose minimal standards for regulatory requirements in the digital asset space — the Travel Rule being the most well-known example. Technology standardization is also developing for smart contract functionality, enabling a better interplay between end-user wallets, custody solutions and other participants.

Until this standardization and consolidation continues to progress, designers, issuers and users of tokenized security products need to involve legal and compliance experts.

Opportunities: Why Tokenized Bonds

Given the challenges, why involve a public blockchain platform at all in regulated security offerings?

One benefit for tokenized securities: more efficient interactions (such as transfers) and consequential cost reductions. These gains can be small if the processes involved are handled through a single financial institution. The public nature of blockchains shines when multiple entities cooperate in the issuance and handling of tokenized securities. Instead of developing ad-hoc integrations between the different parties, it can then be very attractive to lay down the terms of cooperation in a smart contract and subsequently rely on the blockchain to enforce those terms and synchronize between parties.

A good example is a simple whitelisting functionality to enforce permissioned transfers. Before an address may receive tokens, it needs to be explicitly whitelisted. Having a single administrator role that can whitelist addresses would pose a significant bottleneck for day-to-day operations. A recently developed token standard for the Tezos Blockchain 4 introduced a hierarchical system where administrators could nominate addresses that could subsequently whitelist addresses. Thus, the issuing institution can allow an exchange to whitelist customer addresses independently. An audit trail that records who allowed transfers to a particular address is then readily available.

This example demonstrates how public blockchains can enable defining “the rules of engagement” between financial institutions, allowing them to cooperate on a flexible basis and consider a diverse range of securities and institutional arrangements.

Tokenization can transform almost any asset, real or virtual, into a digital token, but not everywhere in the world is already using this new technology. In 2020, the U.S. took a pioneering role again, but other countries are also already experimenting with the possibilities of these financial instruments. We will deal with this topic in another article next week.

1 Source: “Projection of Tokenized Asset Market 2021 – 2025,” Finoa, page 43
2 Source: “Plumbing for the future of security tokens: Implementing KYC in bank transaction processes.” Dr. Lewin Boehnke, Crypto Finance Group, page 20
3 https://www.admin.ch/gov/de/start/dokumentation/medienmitteilungen.msg-id-77252.html
4 https://github.com/rogerdarin/Digital-Asset-Rules/raw/main/Digital_Asset_Rules_S1_v0.3.pdf

This article is an extract from the 90+ page Security Token Report 2021 co-published by the Crypto Research Report and Cointelegraph Consulting, written by thirteen authors and supported by Crypto Finance, Blocklabs Capital Management, HyperTrader, Ten31 Bank, Stadler Völkel Attorneys at Law, Riddle&Code, Coinfinity, Bitpanda Pro, Tokeny Solutions, AlgoTrader, and Elevated Returns.

Corporate and Government Debt as Security Token

By
Crypto Research
-

The increasing number of STOs issued by established institutions indicates the potential of this fundraising mechanism. As the mechanism ripens, more countries and corporations tap into piloting STOs for bond issuance.

Key efficiencies observed within the pilots include elimination of settlement risk (for issuer, arranger and investors), reduction in primary issuance settlement (from 5 days to 2 days), as well as automation of coupon and redemption payments and registrar functionality.1

Thanks to the provided benefits in improving liquidity and transparency in the bond markets, debt tokens could disrupt the bond issuance process worldwide. The European digital asset custodian Finoa estimates that $2.65 trillion will be invested in securitized debt tokens by 2025 (see Chapter 3).

“The marriage of a digital order taking platform and backend infrastructure driven by tokens is the future of retail bonds. We are keen to see the day when investors can buy and sell bonds, even on the secondary markets at a click of a button on their phones.”

UnionBank Executive Vice President and Chief Finance Officer, Jose Emmanuel Hilado 2

Most Notable STOs by Institutions, 2017 – 2020

Source: Cointelegraph Research

Between 2017 and 2020, STOs were most frequently used for financial services, and this category includes bonds issuance.

Number of STOs by Sector, 2017 – 2020

Source: Cointelegraph Research

Asset Classes Offered in STOs, 2017 – 2020

Source: Cointelegraph Research

Looking across the asset types that are being tokenized, equity remains king, although asset backed securities saw a steady increase (mainly due to real estate).

Type of Asset offered by the STOs by year, 2017 – 2020

Source: Cointelegraph Research

Is the tokenization of a security an all around opportunity or does it also pose a risk to certain institutions and companies? This is a question we intend to explore in another article next week.

1 https://www.sgx.com/media-centre/20200901-sgx-collaboration-hsbc-and-temasek-completes-pilot-digital-bond-olam
2 https://av.sc.com/…/SCB_PR-UnionBank-Standard-Chartered-pioneer-blockchain-enabled-bond-issuance-in-the-Philippines-.pdf

This article is an extract from the 90+ page Security Token Report 2021 co-published by the Crypto Research Report and Cointelegraph Consulting, written by thirteen authors and supported by Crypto Finance, Blocklabs Capital Management, HyperTrader, Ten31 Bank, Stadler Völkel Attorneys at Law, Riddle&Code, Coinfinity, Bitpanda Pro, Tokeny Solutions, AlgoTrader, and Elevated Returns.

Real Estate Tokens are leading among Security Tokens

By
Crypto Research
-

Overall, the number of publicly announced STOs increased in real estate, technology, heavy industries, and consumer services between 2019 to 2020. But the highest growth segment in 2020 was real estate.

It more than doubled its number of offerings compared to 2019, while finance and banking saw a steep decline to nearly a third of the previous year’s figures.

Total Number of STOs by Industry, 2017 – 2020

Source: Cointelegraph Research

When it comes to the amount raised, real estate is again at the top with banking and finance taking second place. As mentioned previously, this is mainly due to the Red Swan project accounting for almost all of the capital raised during 2020.

Amount Raised by Industry, 2017 – 2020

Source: Cointelegraph Research

Security Tokens Raised $5 Billion in 2020

Both the target raise amount and the raise amount saw an increase in 2020, however, the most important trend is the increasing success rate (in terms of % of target raised) which seems to have steadily increased over the past four years, as more and more investors begin to familiarize themselves with STOs.

The major segments behind the higher success rate are finance and banking and real estate, as all other segments seem to be lacking in this regard.

Target Amount vs Amount Raised in STOs, 2017 – 2020, $billion

Source: Cointelegraph Research

Percentage of Funding Goal Reached, 2017 – 2020

Source: Cointelegraph Research

That being said it is interesting to see that debt is the best performing class in terms of % of the raise target achieved, followed closely by asset backed. Equity lags way behind. This is likely due to the perceived risks across those different kinds of security tokens.

Percentage of Funding Goal Achieved by Underlying Asset Class, 2017 – 2020

Source: Cointelegraph Research

More countries and companies will also try out STOs for bond issuance as the mechanism matures. We will turn to this topic in an article next week.

This article is an extract from the 90+ page Security Token Report 2021 co-published by the Crypto Research Report and Cointelegraph Consulting, written by thirteen authors and supported by Crypto Finance, Blocklabs Capital Management, HyperTrader, Ten31 Bank, Stadler Völkel Attorneys at Law, Riddle&Code, Coinfinity, Bitpanda Pro, Tokeny Solutions, AlgoTrader, and Elevated Returns.

Swiss Bitcoin Startup Relai Appoints Former Bitpanda Exec as New CMO

By
Crypto Research
-

ZURICH – Zurich-based bitcoin investing startup, Relai, today announced that Imo Bábics will join as Chief Marketing Officer to lead the company’s European expansion plans.

He brings over twelve years of marketing experience to Relai and a proven track record in growing a cryptocurrency startup. As the Head of Marketing at Bitpanda, Bábics built the Austrian fintech’s marketing department from the ground up within two years, paving the way for its future rapid growth. Before Bitpanda, he worked at Universal Pictures in London, where he oversaw the implementation of launch campaigns for Universal’s theatrical releases across the EMEA region.

Relai co-founder and CEO, Julian Liniger: 

“We’re very excited to have Imo join the Relai team. As an experienced marketer with a track record of taking startups to the next level, he will be a valuable addition to our executive leadership team as we move into the next phase of our growth.”

Relai Chief Marketing Officer, Imo Bábics: 

“The best days for Bitcoin are yet to come as it’s shifting from being the domain of pure technologists to the domain of digital natives who are concerned with governments inflating their currencies and looking for ways to protect their savings. I believe Relai has a unique opportunity to become the app of choice for the long-term bitcoin investor with its fast, secure, and hassle-free experience.”

In June 2021, Relai raised CHF 2.5 million in a Series A round led by renowned Swiss VC Redalpine. The capital injection will be used to build the leading bitcoin investing app in Europe and obtain a financial intermediary license.

About Relai

Relai is on a mission to make investing in bitcoin easy. The ‘Made in Switzerland’ bitcoin investment app enables anyone in Europe to invest in bitcoin within minutes and without the need for registration, verification, or a deposit. Learn more about Relai at www.relai.ch.   

Media Contact

Julian Liniger

[email protected] 

What Returns Have Security Tokens Provided?

By
Crypto Research
-

Along with the number of security token offerings grew the number of potential investment objects that have to be examined individually for a return on investment to determine what potential this new technology brings to investors.

According to the security token database1 compiled by the Cointelegraph Research team, there were 80 publicly announced STOs in 2020, just slightly up from the 79 STOs in 2019.2 Although Polymath claims 2019 had 380 security tokens, they are mistakenly combining the total count for ICOs, IEOs, and STOs in the 6th PwC report on ICOs and STOs.3

In 2020, our database reports $4.8 billion was raised by 80 companies, with a major part of the funding coming from two STOs. The first one was Red Swan, a US-based commercial real estate firm that partnered with Polymath and tokenized $2.2 billion in high-end properties. The second notable STO in 2020 was conducted by Thai Central Bank, which sold $1.6 billion worth of savings bonds using blockchain technology.

In 2019, nine security tokens started trading on secondary markets. During their first 18 – 24 months of trading, three of the coins had positive returns (BCAP: +129.01% and two RealT properties: Audubon: +52.93% (+10.38% APY) and Marlowe: +8.59% (+12.39% APY)). Six of the coins had negative returns (SPiCE: −6.04%, RealT property Fullerton: −6.48% (+12.76% APY), 22X: −53.85%, TZROP: −63.75%m PRTS: −66.67%, LDCC: −95.88%. The largest winner since inception of trading on secondary markets has been Blockchain Capital’s BCAP token, and the largest loser was tZERO’s TZROP token. The market cap of TZROP was bigger than the 8 other tokens listed in 2019, which brought down the entire market capitalization of security tokens between 2019 and 2020 by 50%.4

However, 2020 did see some recovery for security tokens. In 2020, the market cap grew 517% from $59 million to $366 million between Jan. 1 and Dec. 31. The daily trading volume grew by over 1,000% between 2019 and 2020 and had an average of $5.8 million in 2020. In 2020, many new coins started trading on secondary markets. The top winners and losers are shown in Figure 5.

2020 Return For Secondary Market Trading of Security Tokens

Source: stomarket.com, Cointelegraph Research

Which types of security tokens do exist? Considering such a versatile form of investment, it won’t surprise anyone that this question can’t be answered completely. It is, however, quite possible to list the most popular forms of Security Tokens. For this reason we will publish another article on this topic in the next week.

1 To purchase the database, contact [email protected]
2 This is not accounting for projects without an announced sale date
3 https://www.pwc.com/ee/et/publications/pub/Strategy%26_ICO_STO_Study_Version_Spring_2020.pdf
4 https://blog.stomarket.com/security-token-market-end-of-year-report-2020-59151e0caa1d

This article is an extract from the 90+ page Security Token Report 2021 co-published by the Crypto Research Report and Cointelegraph Consulting, written by thirteen authors and supported by Crypto Finance, Blocklabs Capital Management, HyperTrader, Ten31 Bank, Stadler Völkel Attorneys at Law, Riddle&Code, Coinfinity, Bitpanda Pro, Tokeny Solutions, AlgoTrader, and Elevated Returns.

Non-Ethereum Blockchains and Protocol Standards

By
Crypto Research
-

After discussing Ethereum and security token issuance last week, this week we will turn our attention to various alternatives. When deciding which blockchain to issue a security token on, an important factor is the software protocol used to represent the asset on the blockchain. Different software protocols have different options for the issuer and specific exchanges only work with certain protocol standards.

Ethereum’s dominance is not as large as it was in previous years, and it seems that projects are looking for alternatives. Tezos is the second most popular blockchain for security token issuance and trading. There are now more than $2.5 billion STs announced with the usage of Tezos blockchain. Tezos smart-contracts are more flexible for security token offering needs, having compliance and regulation features built-in. Elevated Returns was a pioneer in the security token industry and issued one of the the first security token backed by a trophy real estate asset, the St Regis Resort in Aspen, in 2018.

Tezos

Tezos is the second most popular blockchain platform after Ethereum for security token primary insurance and secondary trading. Tezos blockchain offers wider opportunities to test transactions and smart contracts off-chain before launching on-chain, which provides a solid security standard. Tezos also offers secure storage solutions for security tokens as well as flexible upgradeability of smart contracts. Tezos also has all the necessary compliance features including built-in KYC and AML compliance.

Notable uses of Tezos include Societe Generale, which recently issued the first structured product as a security token on the Tezos public blockchain. A large Brazilian investment bank BTG Pactual along with Dubai’s asset manager Dalma capital launched a real estate STO on Tezos backed by Brazilian property. Originally, the STO was launched on the ETH blockchain but BTG Pactual sees a potential in Tezos and that is why the STO was then moved to an alternative platform.

Hyperledger

Hyperledger is an open-source umbrella blockchain project by Linux. It’s product Hyperledger Fabric’s Fabtoken is a protocol which has a cross-chain ability as well as high code and data security. Also, the Fabtoken allows issuers to make and customize their token as thoroughly as they want to, including all the compliance and security features.

Metacoin is the first and quite significant coin made on Hyperledger’s platform. Metacoin consists of several projects — a block explorer, a wallet and a platform where issuers can create their own token. The Metacoin project is focusing on the development of the digital asset market and aiming to create its own blockchain ecosystem.

tZERO

Tzero protocol is made for connecting the traditional market with the digital asset market. tZero protocol was developed to build the first SEC approved exchange for tokenized securities. That is why it has high standards for security and compliance (KYC, AML).

Cat-20/Cat-721

Those 2 token platforms by Seccurency are interesting because they are not tied to the blockchain. It is for the issuer to decide what blockchain he wants to use — Ethereum, Ripple, EoS, GoChain or Stellar. They can also be freely transferred across the blockchains mentioned above. What is more, CAT protocols have in-built KYC, AML, KYB, KYW as well as the validation of investor’s accreditation.

ST20 v1/v2

St20 is a protocol built on Polymath’s own blockchain, however it is fully compliant with the ERC standard tokens. It was one of the first security token protocols on the market. ST20 has in-built KYC and AML services as well as various mechanisms for token customization available for issuers.

Polymath has partnered with several significant blockchain market players including tZero, Minthealth and Blockestate.

SRC-20

This protocol is created by Swarm and operates on its own blockchain. SRC-20 standard is quite significant due to its flexibility, integrated governance and a wide range of assets that can be tokenized. The protocol creators claim that almost everything can be tokenized with the use of their protocol including real estate, investment funds, businesses and development projects. The protocol has an in-built mechanism that secures the right for revenue streams of tokenized assets.

Swarm cooperated with OpenFinance to broaden the usage of SRC-20 protocols. OpenFinance is well-known as a blockchain for private equity and so, there are some collaboration projects based on SRC‑20 standard.

It is very important to ask why security tokens exist and how they are technically enabled. For investors, however, the question of what return Security Tokens offer is also relevant. When looking back at the STOs of the last few years, we see a very mixed picture here, which we would like to explore in more depth in next week’s article.

This article is an extract from the 90+ page Security Token Report 2021 co-published by the Crypto Research Report and Cointelegraph Consulting, written by thirteen authors and supported by Crypto Finance, Blocklabs Capital Management, HyperTrader, Ten31 Bank, Stadler Völkel Attorneys at Law, Riddle&Code, Coinfinity, Bitpanda Pro, Tokeny Solutions, AlgoTrader, and Elevated Returns.

Valkyrie Investments Launch The Valkyrie Dash Trust

By
Crypto Research
-

Valkyrie Digital Assets has announced today the launch of its fourth investment vehicle, the Valkyrie Dash Trust. This new trust for Dash will join Valkyrie’s growing investment product offerings that currently feature a Valkyrie Bitcoin Trust, Valkyrie Algorand Trust, and a Valkyrie Polkadot Trust.

The Trust is the first investment vehicle at Valkyrie to invest solely in Dash, the digital asset that powers the Dash Network. The primary investment objective of the Trust is to reflect the value of Dash held within, to offer investors access and exposure to the cryptocurrency in an insurable, cost-effective manner. BitGo is listed as the custodian for the Valkyrie Bitcoin Trust that will provide institutional grade quality and security. The Valkyrie Dash Trust SEC Registration filing can be found here.

Screenshot of Valkyrie Dash Trust webpage. Source – https://trusts.valkyrieinvest.com/dash

Dash Investment Foundation Invests in Valkyrie

The Dash Investment Foundation (DIF) invested in Valkyrie Investments during their initial seed round in December 2020 signing a SAFE agreement. Valkyrie has since then recently completed a Series A funding round raising $10 million which included an interesting roster of backers such as Tron founder Justin Sun, Litecoin founder Charlie Lee and former Major League pitcher C.J. Wilson. The DIF is the world’s first ownerless and memberless investment fund and is completely controlled by Dash’s decentralized Masternode Network.

Who Are The People Behind Valkyrie?

Valkyrie’s team is comprised of industry-leading investment professionals with a wealth of financial knowledge and investment management expertise who have previously launched multiple ETFs, publicly traded funds, and ETPs, including Bitcoin funds with backgrounds across Guggenheim Partners, UBS, Chicago Board of Trade, Chicago Mercantile Exchange, and The World Bank.

Valkyrie CEO, Leah Wald began her career working at the World Bank. Leah recently served as the VP of Portfolio Management at Exponential. Previously she served as a Partner at Lucid Investments, an asset management firm where she launched their Bitcoin investment arm. Leah has developed investment strategies for two of the world’s top-performing multi-billion dollar asset managers.

Valkyrie CIO, Steven McClurg is a former Managing Director at Galaxy Digital and has a long history in investment and portfolio management. Steven was previously the Founder and CEO of Theseus Capital that was founded in 2018 and was later acquired by Galaxy Digital.

How Will The Valkyrie Dash Trust And DIF Investment Help Dash?

The Valkyrie Dash Trust will provide several benefits including:

  • Institutional investors will now be able to purchase Dash through the fund.
  • increased accessibility to Dash through traditional financial markets.
  • Increase in Dash awareness and adoption.

Dash will benefit and profit from the growth of other products such as Valkyrie’s Bitcoin trust, or the launch of new products, such as ETFs or trusts in other digital assets in the future. As a partial owner, this means that as Valkyrie Investments grows, so will the value of Dash Investment Foundation’s shares in Valkyrie. Investment returns to the Dash Investment Foundation can then be reinvested in Dash’s ecosystem.

Quote from Leah Wald, CEO of Valkyrie Digital Assets. Source – https://newsroom.dash.org/150242-valkyrie-investments-announces-launch-of-the-valkyrie-dash-trust

Ryan Taylor, CEO of Dash Core Group provided more insight as to why is it so important for institutional investors to have access to Dash:

“Institutional investors can help expand access to new jurisdictions and investors. For example, with a stock exchange listing through a Dash trust, it will be much easier for the public to hold Dash exposure in tax-advantaged accounts like retirement accounts, or gain access in jurisdictions like New York state. Institutions also have unique needs for services like custody that Valkyrie provides as part of the trust. This solves many issues surrounding asset security and controls that might otherwise prevent institutions from investing.”

Ryan Taylor, CEO at Dash Core Group

Is Dash Actually Being Used As “Digital Cash” For Payments?

The Valkyrie Dash Trust launch comes only one week after the launch of DashDirect, a groundbreaking instant-savings retail app that allows users to pay with Dash and obtain exclusive discounts up to 12% on everyday purchases at over 155,000 national chain retailers and 125 online stores in the U.S. featuring retailers such as Best Buy, DoorDash, Instacart, CVS, Lowe’s, Staples, The Home Depot, Autozone, GameStop, Chili’s, Ulta, Chipotle, Subway, American Eagle, and more.

“The DashDirect retail-saving app developed by CrayPay has transformed and revolutionized how I fulfill my everyday shopping needs within the United States. DashDirect provides unrivaled utility with the ability to perform payments with the cryptocurrency Dash coupled with significant discounts at the largest retailers in America. Paying for goods and services with Dash has never been so easy with increased accessibility to both in-store and online merchants. The DashDirect app is a game-changer for the crypto payments industry as it allows me to spend Dash at nearly seven times more merchant locations than Bitcoin’s global reported total.”

Mark Mason, Dash Media and Business Relations Manager

Dash is gaining incredible traction in the market for real-world use and adoption. In fact, Dash has experienced its 20th straight quarter of adoption growth. Dash as a decentralized network open source project is very much focused on expanding adoption and mainstream use. Dash’s development roadmap highlights the upcoming launch of DashPay, a wallet with a username-based payments experience to which mainstream consumers are already accustomed, in addition to enabling anyone to create their own decentralized applications with Dash Platform. These significant improvements in user experience will likely accelerate Dash’s user growth rate further.

Blockchains for Issuing, Storing and Trading Security Tokens

By
Crypto Research
-

When deciding on which blockchain to issue a security token, an important factor is the software protocol used to represent the asset on the blockchain. Each software protocol has different options for the issuer, and certain exchanges only work with certain protocol standards.

Ethereum remains by far the most popular platform for security token offerings, because it has huge liquidity, simply created smart contracts and well-known standards for token issuing. Moreover, there are lots of wallets, exchanges and platforms that are ERC compatible, where holders and issuers can easily store, transfer, and manage their tokens.1

Overstock, which is the largest security token project on the market, is made with the ERC-20 standard. Overstock is a large NASDAQ listed internet retailer which specializes in furniture sales. OSTKO token allows its holders to get dividends. Its market cap is more than $280 million and daily trading volume is around $100,000.2

Ethereum’s dominance is not as large as it was in previous years, and it seems that projects are looking for alternatives. Tezos is the second most popular blockchain for security token issuance and trading. There are now more than $2.5 billion STs announced with the usage of Tezos blockchain. Tezos smart-contracts are more flexible for security token offering needs, having compliance and regulation features built-in. Elevated Returns was a pioneer in the security token industry and issued one of the the first security token backed by a trophy real estate asset, the St Regis Resort in Aspen, in 2018.

The Aspen Coin, which was initially issued as an ERC20 token, is now hosted on the Tezos blockchain, deemed by Elevated Returns as the best blockchain for STO’s. The Aspen Coin is more significant by its structure than by its size. Since inception, a total of 12% have been paid out to token holders as distributions, both in fiat and cryptocurrency. The token is now trading on the tZERO ATS. Furthermore, Aspen Coin offers additional features like perks attached to the ownership of the token. The perks are financial such as up to 50% cash back on a hotel stay as well as access to unique experiences only available to members.

Elevated Returns has recently created a completely regulated digital finance ecosystem, which is going live this summer (July 2021) in South East Asia. The Elevated Returns team has spent 2 years acquiring licenses and made a major investment in Xspring Capital which owns a regulated security token platform in Thailand. This will bring to the market the first unrestricted regulated public offering with simultaneous listings on a regulated exchange. The token is backed by a real estate asset and will be listed on the ERX digital asset exchange. There are several large companies aiming to launch their future STOs using Tezos blockchain — tZERO, BTG Pactual, Dalma Capital, Fundament group and some others.3

Number of STO by issuing platform, 2017 – 2020

Source: Cointelegraph Research

Ethereum-based Security Tokens

Types of Ethereum-based Tokens

Source: Adapted from E&Y Tokenization of Assets report, Cointelegraph Research

In order to be compatible with wallets and blockchains, an issuer must use the same standards as the other players. However, the ERC-20 doesn’t allow for the enforcement of the rules and regulations that govern private securities. A few of the options that security token issuers are looking for when choosing an appropriate standard include:

1. Encoded Compliance — The transfer rules are embedded in the securities and can never be transferred to an ineligible individual in either the primary or secondary markets.
2. Reduced Costs — Fees to do with settlement and reconciliation are dramatically reduced with compliant P2P transfers.
3. Controlled Securities — Issuers remain in control of the tokens, even with investor self-custody.
4. Increased Transferability — the reduction of friction points across the value chain unlocks highly transferable assets.

The ERC-20 protocol is the original and oldest standard for issuing tokens. However, it has its own vulnerabilities and disadvantages. For example, tokens can be drained from the smart contract with no recovery possible, or an investor could not retrieve their tokens if they sent them to a non-ERC-20 wallet or smart contract or if the holder loses his private key. There are also compliance and regulatory issues such as being difficult to set all the necessary KYC and AML procedures inside the ERC-20 standard. For example, you cannot enforce KYC for secondary market trading. In that case, many alternative protocols were developed to help suit the security token market’s needs. All those alternatives (ERC-1400, ERC-721, ERC-1155, etc) are compliant with the ERC-20 standard which means that they can be easily stored, exchanged and transferred with ERC-20 infrastructure.4 5 6 7

Alternatives to Ethereum’s ERC-20 include:

DS Protocol

DS is an open-source protocol , which was designed by Securitize specifically for securities and supports third-party applications. It has special DS apps, which address relevant events connected to the tokenized economic rights (issuance, trading, cap-table generation, governance events, required pay-outs). This protocol also has integrated compliance and registry services. Tokens made with the use of this protocol are user-friendly — it is easy for holders to manage their tokens and they regularly receive various updates related to their tokens.

Current Media’s CRNC token. It is a token of a reward based streaming platform Current, which pays its users for using their service and providing data. The token is aimed at giving users better rewards while engaging the media.

Blockchain Capital token BCAP is also based on DS protocol. Blockchain Capital is a large venture capital firm specializing in investing in blockchain based projects. Blockchain Capital used DS protocol for their STO due to the compliance, regulations and security features offered by Securitize for their security token.

R-Token

R-token is an ERC-20 type token made by Harbor with some extra features added: in-built KYC, AML and taxation services as well as some flexible functionality which helps the issuer to make the necessary regulatory configuration. R-token standard allows the creation of tokenized regulated securities.

Harbor, which created R-token, was acquired by the most popular digital asset custodian BitGo in 2020 and gained broker-dealer and transfer agent licenses. BitGo, in turn, was recently acquired by Galaxy digital — one of the most significant digital asset focused VC. We see those acquisitions as a possibility for BitGo to become a clearing house for the security tokens.

iCap Equity which is a real estate firm based in Seattle is using Harbor R-token for tokenizing its assets.

T-REX

T-REX is a protocol built on the public Ethereum blockchain which was created by Tokeny Solutions, which has been recently been renamed Tokeny Sarl. Although T-REX is Based on the ERC-20 standard, it has more than 100 options that can be used by issuers in order to enforce compliance and manage control for the issuer, agents, and investors.

Tokeny Sarl state that they have more than $8.5 billion of tokenized assets with the help of their T-REX protocol.

For example, Metalstream — a South-East Asian precious metal company. Their tokens are backed by gold and as it is stated by the token issuers — 1000 MSGLD tokens can be exchanged for 1 kilo of gold. Also, the token holders can get a discount on purchasing gold of up to 40% of market spot price.

SFT

SFT protocol by Hyperlink Capital uses Solidity programming language which is used by ETH developers, that makes the SFT part of the ETH network. Basically, this protocol is similar to ERC-20 with the same comfy features which allow to easily build a smart contract. However, it is more complex and secure and that is why, allowing to tokenize debt and equity-based securities.

ERC-1404

ERC-1404 was developed by Tokensoft and based on the ERC-1400 standard and is the ETH based SEC approved standard for security tokens. Which means that it fulfils the necessary security and compliance requirements including in-built KYC and AML (both for primary and secondary market).

Tokensoft launched its own STO based on their ERC-1404 standard. Tokensoft is one of the most significant security token platforms on the market. It has a platform for launching STOs as well as asset management features. What is also interesting, Tokensoft is permitted to deal with SEC registered securities.

Nevertheless, Ethereum is not the only platform out there that allows its users to issue a Security Token. That is why we will dedicate another article to Tezos and other blockchain platforms next week.

1 https://www.leewayhertz.com/launch-sto-security-token-offering/
2 https://stomarket.com/sto/overstock-ostko
3 https://medium.com/tezoscommons/security-tokens-on-tezos-why-tezos-4a7065f49a06
4 https://micobo.medium.com/security-tokens-an-erc-standards-comparison-919e7c379f37
5 https://medium.com/ethex-market/the-ethereum-blockchain-and-erc20-tokens-technical-challenges-and-solutions-for-2019-and-beyond
6 https://www.apriorit.com/dev-blog/555-erc20-token-vulnerability
7 https://www.youtube.com/watch?v=OZVlMXwOlXM

This article is an extract from the 90+ page Security Token Report 2021 co-published by the Crypto Research Report and Cointelegraph Consulting, written by thirteen authors and supported by Crypto Finance, Blocklabs Capital Management, HyperTrader, Ten31 Bank, Stadler Völkel Attorneys at Law, Riddle&Code, Coinfinity, Bitpanda Pro, Tokeny Solutions, AlgoTrader, and Elevated Returns.

Plumbing for the future of security tokens: Implementing KYC in bank transaction processes.

By
Crypto Research
-

Decentralized finance is flourishing. With no central parties involved and few regulations in place, tokens are springing up all over. But what about regulations and how are they affecting this new industry?

Practitioner Perspective with Dr. Lewin Boehnke of the Crypto Finance Group

Most commonly, a public blockchain is also the medium of choice when multiple financial intermediaries cooperate to issue a tokenized product. Public smart contract platforms are becoming a sweet spot for a whole class of centrally issued securities. However, tokenized real-world assets offered by centralized and regulated issuers require Anti-money Laundering and Know Your Customer policies, and this form of centralization opposes the decentralized nature of the network.

The precise obligations, which regulated financial institutions have, heavily depend on the details of the token. What is the role of the institution? Is it the issuer of a product? Is it a custodian or co-custodian? In addition, the regulatory situation of the asset itself, as well as the jurisdiction in question, factors in.

Standardizing asset types and the corresponding token functionality will ease the handling significantly, but for the time being, these are mostly customized considerations. Given these inconsistent obligations, it is difficult to build processes that integrate neatly with client wallets, have a familiar user experience for the holder, and enable well-established processes for banks.

Consider the traditional operations when a client initiates a transaction, for example. Some checks are executed immediately and automatically, but if a transaction is flagged, it may be stalled, and may or not be executed after the pending checks.
Although such operations could be mimicked by a token smart contract, there are two drawbacks.

  • First, many of the automated checks cannot be completed with a smart contract because e.g. they require confidential internal information. This can limit the approvable transactions immediately to very few cases — e.g., transferring small amounts between users who are both asset holders already.
  • The ideal solution is doing checks during the transaction. This process of going from an on-chain & off-chain (hyphen use consistency in entire text) checks brings us to the second drawback: the user’s experience with the wallet will likely break completely. User wallets expect a transaction to either make it to the chain, in which case the balances should be changed to reflect that, or to fail, in which case, this is clearly indicated to the user. If a transaction check is pending off chain, the intermediate on chain state cannot be interpreted by the user’s wallet. The balances in the users’ wallets only change once a bank’s approval has been published on chain.

In other words, the blockchain simply cannot reach out to the bank, so the bank has to make an entry on the blockchain.
Besides such post-checks, two more options exist:

1. Pre-checks improve the situation by feeding information about the transaction or addresses into the contract before the holder attempts the operation.

2. and finally, (2) there is the ideal solution of doing all checks during the transaction. When the holder includes the countersigning by the institution in the operation, the contract can check this and act accordingly. Despite being the best option, in our view, this does require some additional plumbing. An ERC-20 contract, for example, does not allow additional data to be provided. ERC-223 and ERC-777 do allow this, but they have very limited support from wallet software. The additional pre-check between the contract and the bank would ideally be included in the wallet as well.

There are still many challenges to solve before the plumbing is in place for blockchain technology to fully disrupt the financial industry, but we are on it.

Find out more about tokenization in the finance sector from the Crypto Finance Group: cryptofinance.ch

This article spoke about ERC-20 contracts as well as ERC-223 and ERC-777 contracts, but what is the technological meaning behind these terms and are there more forms of contracts that can be used when issuing a Security Token? Next weeks article will deal with this question.

This article is an extract from the 90+ page Security Token Report 2021 co-published by the Crypto Research Report and Cointelegraph Consulting, written by thirteen authors and supported by Crypto Finance, Blocklabs Capital Management, HyperTrader, Ten31 Bank, Stadler Völkel Attorneys at Law, Riddle&Code, Coinfinity, Bitpanda Pro, Tokeny Solutions, AlgoTrader, and Elevated Returns.

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